Those calls and puts are hedged by shares of stock, that’s why buying 100 call contracts will move the stock price.
Most hedge funds are partnerships or some other passthrough vehicle. This means the character of the income is passed on to the investor. What happens is that the hedge fund engages in financial transactions to convert their short term capital gains into long term capital gains.
Not really true. I can sell naked call options or naked put options. I don’t need the reciprocal position to sell those options.
This risk can be created out of whole cloth. The open interest on a stock is ferquently greater than the entire float.
There is a time value of money component as well - you loose money on long term capital gains because you have it tied up for longer. Granted, with LTCG kicking in after a year, that argument isn’t valid - but it IS a good one when I’ve held my Disney stock for 12 years and sell it for a 20% gain. Inflation ate away all that gain - and then you tax it at 36% - are you TRYING to get me to not invest?
If I were setting tax policy, I’d index long term capital gains rates to inflation based off the time the stock was held. This would have been a nightmare 20 years ago, but people who buy stock aren’t doing their taxes by hand and looking up rates in a table anyway.
A 15% capital gains rate does not require a 15% rate of return. A 15% capital gains rate merely reduces your after tax return by 15% so if you are looking for an after tax return of 8.5% you need something that will provide you with a 10% pre-tax return. So some marginal investments do not get made because the tax on the income reduces the anticipated profit by enough to amke it unattractive.
If capital gains were treated as ordinary income, people would demand higher rates of return from their investments and some investments would not get made. Oddly this might lead to MORE risk taking.
$3000/year
Wel most brokerages do all those calculations for you unless you trade the same security in different accounts.
From a tax equity perspective it is horrible. From an econmic efficiency perspective, there is no reason why a 15% capital gains rate is more important than a 15% earned income tax rate. Why is it so much mroe important to relive taxation of investment income over earned income?
In order to maximize tax revenue (at least in theory).
Or just tax real gains, rather than nominal gains. That’s simple enough that diehards like me who still do their taxes by hand could do the calculation easily.
The risk argument doesn’t hold water. Sure, if I make a bold entrepreneurial investment in some promising start-up, I’m taking a big risk, and yes, there’s the chance that I might lose it all. But if that happens, the tax rate is irrelevant, because I haven’t realized any capital gains. It’s only if the investment is successful that the tax kicks in-- It won’t ruin anyone.
And then there’s the fact that if an investment does fail, it’s suddenly considered normal income again, and counts as a deduction under the normal income tax rates. Once you’ve got that asymmetry there, you’re just asking for people to game the system.
The biggest differnce is that earned income is paid out as it accumulates, but investment income is only paid out when you cash out. It is known as the lock-in effect and the higher the costs to cashing out the less likely folks are to cash out. Ideally there would be a “wealth tax” that taxed the value of your assets as opposed to just realized gains, but administratively that can be very difficult.
You are absolutely right about the details on the math there, I was far too loose and off the cuff about it. But the point is the same, the higher the capital gains tax the less likely capital can move to more econoic resources.
It actually holds quite a bit of water.
If you sit down at a blackjack table, and bet $10 in chips, you know that if you win you’ll have $20, if you lose it’s all gone.
Would people be as willing to play if the odds were the same by they only got $15 back on a win, but still stood to lose it all?
How about this: Tax real gains, as iamthewalrus(:3= said, & further allow investors to divide their gains by the number of years the investment was held–then tax as normal income, presto.
Personally, I think the capital gains tax should be zero. Why tax investment? Tax consumption. a 15% sales tax and no income tax would be a much more economically sound system. Hong Kong has no capital gains tax and over the past 50 years has been one of the best examples of successful capitalism in the world.
Ooh boy. Well, I would think in the interest of–for want of a better term–“fairness,” any capital gains tax should apply to losses–that is, a 15% capital gains tax should mean a 15% negative income tax (or refund) for capital losses. Otherwise there’s an advantage to the government for some investors to win big–paying the full tax rate–while others lose big, but cost the government nothing. And I don’t think we should encourage that.
:dubious:
http://en.allexperts.com/q/China-Hong-Kong-191/hong-kong-pay-living.htm
Hong Kong has an income tax, not a consumption tax base.
Well, good. Isn’t the whole point supposed to be to encourage investment? But someone cashing out is doing the opposite of investment. So we keep the capital gains rate high, to lock them in and encourage them to keep investing.
Well this is a pretty heady discussion by my standards. Let me see if I have this right. In 2011 LTG will go from 15% to 20%. STG will still be treated as ordinary income. The difference between LTG and STG will shrink, making speculation (ST) relatively more attractive compared to investing (LT). There is a tradeoff between liquidity/efficiency and volatility, and increased speculation will fuel volatility in the market.
The average stock holding period on the NYSE in 2007 was 7 months (cite ) and is probably less by now. With computerized trading it is often minutes or seconds.
So it’s tempting to conclude that we have too much volatility already, that increasing the LTCG is the wrong way to go, that increasing STCG would achieve a healthier result by encouraging longer term investing and reducing volatility.
But then there’s this (Thanks Damuri for your insights):
So all those quick trades that banks are churning all the time end up getting taxed as LTCG? Meanwhile the individual small-investor tinkerers get stuck paying the STCG. I know a lot of them (I was one for years until I pulled the rip cord) and it’s extremely rare to hold a stock for a whole year. That’s kind of annoying, just on a personal level.
It would be nice to separate actual (useful) capital investment from money machines that continually move money between different piles based on tiny movements in stock price. I thought that’s what LT/ST CG was supposed to do but if so it’s broken.
Then why do we tax ALL of your interest instead of only that portion of interest in excess of inflation. You sat on an investment that wasn’t beating inflation.